The royal commission would make a great television comedy if it wasn’t so sad. At the heart of this week’s hearings are stories of shattered dreams and the harsh reality of failure.
There are really only two archetypes in Hayne’s melodrama: heroes and villains.
The banks have been cast as the villains in this story, while their unsuspecting customers play the tragic heroes, the battlers, people like you and me who have tried hard and failed. It’s a story everyone can relate to — that’s the problem.
As the royal commission publicly uncovers misconduct in the financial services sector, we are only being shown one side of the story. Watching the events unfold, one would think that the banks have never lent an honest cent to anyone, ever. That all businesses have failed and the banks and brokers are to blame. At least that’s the way the show ran this week.
A disabled pensioner, blind and riddled with medical problems; her daughter, a budding small business operator.
An ambitious woman trying her hand at running a pie shop with the hope of retiring early.
The bumbling banker, lost for words, under pressure and facing a barrage of questions, being tripped up by the QC. Yet confidently standing by the bank’s processes.
These are the characters in a story that will impact the future of small business lending in Australia and have consequences for 2.2 million SMEs currently employing most of the working population.
Small businesses need to borrow money. The banks need to lend money. Both parties need to be responsible in how they go about it.
If a business loan is too risky, the bank can simply turn it down. But then how is Australia’s small business community expected to take a chance? Let’s be clear: deciding to borrow money from a bank to purchase a franchise is a serious gamble, particularly when you’re putting your home or investment property (or a family member’s) on the line. It’s risky — but isn’t that the nature of the game?
In an effort to regulate the system as tightly as possible and somehow save people from themselves, we are in real danger of losing touch with reality.
Luckily, the reality was made clear by senior counsel assisting Michael Hodge QC in his opening statement this week.
“Most, though not all, of the case studies that you will hear about involve the closure of a business,” Mr Hodge said.
“There is little robust data on the causes of closure of small businesses in Australia. It is important to note first that a small business ceasing to trade is not necessarily synonymous with business failure.
“Many businesses cease to operate on their own terms. In its 2015 inquiry report on business set-up, transfer and closure, the Productive Commission found that over 90 per cent of business exits are not the result of formal insolvency, and the majority are voluntary and do not involve business failure.
“In the same report, the commission also observed that voluntary business exits include successful exits such as selling the business for a profit or merging with another business.”
Mr Hodge went on to cite the recent Productivity Commission inquiry, which found that initial funding for new businesses, whether debt or equity, was usually provided by the personal resources of business founders; that is, by personal savings, personal credit cards or equity and personal assets such as real estate.
“However, many new businesses also seek finance from banks in the form of business loans, trading facilities and overdrafts, and including on the basis of personal capital or equity being provided. In this way, small business lending is often intermingled with the finance of the business owner or the owner’s family,” the counsel said.
Data provided by the major banks to the Productivity Commission show that around 33 per cent of all small business lending by the major banks is secured by residential property.
Given this, it is fundamental to the current small business lending process, particularly among the major banks, that residential property can be used as security.
What the stories from this week’s royal commission hearings have shown is a lack of guidance and independent advice made available to prospective small business owners.
Banks can’t provide that advice — they are the product provider. But there needs to be some intermediary that can be called upon to put family ties aside and explain the facts clearly to those people wanting to quit their day job, borrow against their parent’s home and have a punt at running a small business.
Failing that, we can’t keep pointing the finger at supposedly villainous banks and brokers for lending to customers eager to borrow. It’s what they do. That’s the business they’re in.
Australians must also be allowed to have a fair go and try, succeed, and even fail as small business owners.
The biggest tragedy would be a world without risk, where people are unable to borrow and banks are unwilling lend.